DBRS Morningstar Confirms Credit Ratings on Two Classes of Institutional Mortgage Securities Canada Inc., Series 2013-3

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2013-3 issued by Institutional Mortgage Securities Canada Inc., Series 2013-3 as follows:

-- Class E at BB (sf)
-- Class F at C (sf)

The trend on Class E remains Stable, while Class F has a credit rating that does not generally carry a trend in Commercial Mortgage-Backed Security (CMBS) credit ratings.

The credit rating confirmations reflect the sustained concerns regarding the three loans remaining in the pool: Lunar and Whimbrel Apartments (Prospectus ID#10, 37.1% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11, 34.7% of the pool), and Parkland and Gannet Apartments (Prospectus ID#17, 28.2% of the pool). These loans are secured by multifamily properties in located Fort McMurray, Alberta, and performance has been depressed since the downturn in the oil and gas industry in 2014, with debt service coverage ratios falling well-below breakeven. The loans are currently on the servicer’s watchlist for performance declines and increased risk of default. Based on the April 2023 rent roll provided for all properties except for the Lunar Apartment, the occupancy rates were reported between 83% to 97%, with average rental rates ranging between $1,244 per unit and $1,445 per unit, compared with the March 2022 occupancy rates, which ranged between 91% to 92%, with average rental rates between $1,259 per unit and $1,351 per unit. The sponsor for these three loans, Lanesborough REIT, has worked with the servicer to formalize several loan modifications over the years, allowing various forms of payment relief and maturity extensions, with the most recent maturity extending through February 2024. With each extension, the borrower was required to make principal curtailment payments of $600,000 at scheduled intervals, with the last payment made in August 2023.

Although the borrower’s commitment to the loans is noteworthy as demonstrated by principal curtailments and debt service funded despite significant shortfalls at the collateral properties, the historically depressed cash flows will continue to present elevated risk for these loans considering the near-term maturity, compounded by the challenging lending environment. For this review, DBRS Morningstar analyzed the loans with a liquidation scenario based on stressed values derived from a stressed capitalization rate on most recent year-end cash flows. The results suggest a total loss of approximately $2.8 million, which would be contained to the first-loss piece, Class G and Class F, that is currently rated C (sf), while Class E is likely to be recoverable, thereby supporting the credit rating confirmations.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

These credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is winding down, with only three loans remaining in the pool. In those cases, the DBRS Morningstar credit ratings are typically based on a recoverability analysis for the remaining loans.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/422859)
-- Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)
-- Legal Criteria for Canadian Structured Finance (June 20, 2023; https://www.dbrsmorningstar.com/research/416101)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].